The Game with Alex Hormozi - My Investment Thesis | Ep 647

Episode Date: January 31, 2024

The game has changed, and the entire economy has shifted. How will you continue to play? Today, Alex (@AlexHormozi) discusses his investment strategy and its evolution, including transitioning from banking to treasury bonds for better safety and returns, focusing on understanding the investment area, and shifting towards private deals. He also presents a three-step investment strategy that involves self-improvement, risk diversification through indexes, and leveraging one's main game.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(1:13) - The role of banks in investments(3:04) - Exploring alternatives: U.S. government bonds(6:19) - Investment strategy evolution(8:18) - The power of knowledge in investing(9:55) - Investing in private deals(14:37) - Investing in what you know: A case study(16:32) - Three-step investment phaseFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition(This episode is a re-run. Original airdate was December 29, 2022)

My investment strategy, after all of this time, has gone completely back to my business strategy, which is singular focus, do the things you know, do more, do it better, and keep doing that for an extended period of time. And it would be unreasonable that you don't win. The wealthiest people in the world see business as a game. This podcast, The Game, is my attempt at documenting the lessons I've learned on my way to building Acquisition.com into a billion dollar portfolio. My hope is that you use the lessons to grow your business and maybe someday soon, partner with us to get to $100 million and beyond. I hope you share and enjoy. The game has changed. The entire economy has shifted and so too should your investment, at least mine has.

And so there are three things that you absolutely have to know. Number one, the way you put your money has to shift because the economy has changed. Number two, I've taken all my money out of banks and I'll tell you where I put it instead and it's safer and gets me higher returns. And at the end, I'll explain to you exactly what I'm doing with my money right now and how it's different from the two other investment strategies I've had throughout my life. So, number one, because the economy has changed, things are priced differently. There's inflationary pressures, real estate is hanging on by a thread, crypto is crashed, socks have crashed. So what is a boy to do? Well, I'll tell you, my investment thesis, first off is what do you do with your cash? All right? So if you've ever heard Warren Buffett or you heard people in the news say he has X billion dollars in cash or cash equivalence, I never knew what that meant. And so I'm going to rewind and explain what actually putting in a bank account means and why it's important in today's environment. So when you put cash into a bank, you're actually writing the bank alone to then loan your money and get something back. People don't know this, but you actually are a creditor of the bank. So if a bank goes out of business, they owe you money, right? You loan them money. Now, what happens is the bank will do one of two things. They will loan

it out. Well, actually, they do one thing. They loan money. But they will either loan money to the government by buying bonds, right, which is buying debt, or they will loan it out to people and mortgages and things like that, right? Or credit lines for businesses, whatever it is. They loan the money out again and they make more than they pay you. And so right now, if you look at your Bank of America account, they'll pay you between 0.1 and 1% annually on your money. Okay, boo. That sucks. Now, here's what's interesting and most important about debt when you loan people money. There are two factors. One is what are you going to get back, which is the interest rate, and the second is how likely are you going to get it?

Okay. So the interest rate is if you loan someone of money for a house and it's 5% or whatever, then if you put $100,000 and you get $5,000 back, right? That's what it is. You get $100 plus the extra $5. That's the interest. And you get paid that for taking on risk. All right, interest is a function of risk. That's how it works. Now, this is what's crazy. And I didn't understand this. When I was putting my money in the bank, if the bank goes under, you lose all your money outside of the FDIC insured amount. Now, the FDIC right now is completely bankrupt anyways. And on top of that, it exceeds that amount, you get stock in the bankrupt company. Whoopty-do.

Probably not the best outcome you wanted when you wanted to go draw your money down. Right, of course not. So what if there were a better alternative that was lower risk and had higher returns? I just learned about this. And the reason I always ignored it was because it looked boring and ugly. So when the bank has your money, I said they loan money out. You know who they loaned it to a lot of times? The U.S. government.

Now, why do they do that? because the likelihood risk that the government is going to be able to pay them back extremely high. Why? Because they can print the damn money and give them back to them. Number two is that they are making more than they are paying you. So they take your money for 0.1% a year and then they give it to the government and the government gives them 4% a year. So they get 40 times what they pay you by giving the U.S. government money, right? And so what's interesting is that if we were to analyze both, one, you have a bar, from the bank, right, because you're putting money in and they pay you a little bit,

which one of these pays more? 4% from a treasury or 0.1% from a bank. The treasury from the U.S. government. Now, which one is more likely to go out of business? A bank or the U.S. government? Well, let's see. Who's going out of business in the last 100 years? Banks or the U.S. government?

Well, more banks have. So this is both lower risk and higher return. Bingo. Ding, ding, ding. Right? We have a winner. Now, the only other reason that you get lower interest here is because the money is immediately accessible. It's liquid. So you can go tomorrow and get money out, right? That's how

it works there. But the thing is, is that treasuries are also immediately tradable. So the only other reason that you would get a lower interest rate is because something is more liquid, meaning you can trade in and out of it at your desire whenever you want. A more liquid thing will pay you less because you can get in and out. Right. So here's the thing. Treasuries are just as liquid as a bank account for two reasons. Number one, because you can take a loan against treasuries in real time. You get 80% of your money. So if you put $100,000 in bonds for the U.S. Treasury bonds, T-bills is what they're called. You can get 80% of that up to at a super low secured interest rate to go and plow into something else. Number one. Number two, country and entire governments trade in U.S. treasuries,

which means that you will never have an amount of money that you can't trade in half a second. For example, right now, if you wanted to trade Bitcoin, you could go and sell it in half a second, right? It's not a problem. Like, you can get the money. T-bills trade even faster than Bitcoin by a fucking mile, right? And so you have immediate access to the money. It's lower risk because the government's not going to go out of business. Compared to a bank, it's lower risk, right?

And then you're going to get 40 times the earnings that you are in a bank. Now, here's an interesting thought for you. Instead of putting the money in the bank and then betting the bank's going to stay alive and paid a little bit, you could do an identical transaction and just buy a bond from Bank of America and get 5% or 4.7% from Bank of America. And it's literally the same thing. You're betting on the fact they're going to stay there, but now they pay you 4.7% rather than 0.1%. And the reason you're like, why don't people do this? Because they don't know.

And the banks are, you're like, why don't they talk about this? Because why would they? They are happy to take your money and go make 5% on it and pay you 0.1. That's the business. Why would they tell people, right? This is how it works. So in this economy, I have shifted to almost all cash. I have a few ETFs and I'll tell you what I'm actually doing with the money now. And this is important. So my entire structure of investments has changed over the last five years, really last 10 years. The first chunk of my life was SME 500. I put all my excess cash into learning skills, getting access to people, coaching, bunch of trips, workshops, et cetera, courses, all of that so I could increase my earning capacity. highest return investment I still have ever made today. Number one. Number two, once I had more money than I could possibly reinvesting courses and coaching and whatnot, I started plowing into the S&P 500 because that's what Uncle Warren told me to do. I figured if it worked for him,

would work for me. So I plowed all my money into indexes. That was the next phase of my investing. The third phase came post-sale. All right, so we sold three companies last year, and I talked to a bunch of different friends who were very, very wealthy, and one of them is a very good investor. and he outlined a strategy formula you called a barbell strategy, which is I have stocks over here. I've got real estate over here, very little in between, and then I just have my private equities of the companies that I own personally. Those are the three different buckets.

So I'd make money here and plowed into these two, right, with basically nothing in between. Now, here's the thing that you don't know. In the last two years, I've maybe made five investments, and those investments represent in total, maybe 10% of the cash that I have, not a lot. Real quick, guys, if you can think about how you found this podcast, somebody probably tweeted it, told you about it,

shared it on Instagram or something like that. The only way this grows is through word of mouth. And so I don't run ads. I don't do sponsorships. I don't sell anything. My only ask is that you continue to pay it forward to whoever showed you or however you found out about this podcast that you do the exact same thing. So if it was a review, if it was a post, if you do that,

it would mean the world to me and you'll throw some good karma out there for another entrepreneur. I didn't realize what the problem was until I saw a video from Dave Ramsey. And before you cast judgment, you really need to hear this out because it really changed my life. And I hope it changes yours. So I was watching a video where Graham Stephan was having Dave Ramsey analyze his investment portfolio. And he said, hey, Dave, don't you feel like I'm over indexed on real estate? He said, like, you know, 80 plus percent of my net worth is in real estate deals. And Dave Ramsey gave one of the wisest responses that I've ever heard in investing, and it changed my life.

he said, well, if you put a big circle on the table, and I'm loosely paraphrasing, and we had to say, what percentage of your knowledge is real estate versus stocks and bonds and other stuff? What would you say it is? He said, oh, well, I don't know, 80, 85% of what I know is really about real estate. And he looked at him, he was like, well, then that's a perfect distribution for you because it reflects your knowledge. So where you invest is what you know. And so then he went on to say, I have talked to many, many billionaires, probably far more than I have. He said, I've learned two things from them. He's learned many things, but two things from investing. He said, they don't do many things. And the things they pick are things they understand

and they do a lot of them. And for whatever reason, the combination of understanding that in the circle, this is the slice of the pie that he knew and that the people were the richest in the world, just pick one game or two games they know really well. And they do a ton of those games is what changed my perspective. And so as soon as I heard that, I, one, took all my money and put it into treasuries because I understood that the banks weren't going to give me anything for it. And this is lower risk and gets me a better yield. And it's immediately liquid, just better in all accounts. And then we decided, this was a big deal for me, I only do private deals. And the reason that this became real for me is that I had the biggest deal that I will have done, which I'll tell you about

later, maybe a few years from now, financially, that normally I wouldn't write a check one-tenth that size to a real estate deal or an apartment complex or some other thing that I don't understand. And so I always was banking on other people to be like, do I really trust this guy? How much is he trying to scrimer? What are the fees here? Where are the hidden things? How do I know this is going to pay off? And the things is like, real estate's not my game.

It's not my game. I'm not a real estate whiz. It's not my thing. If you're not a real estate whiz, I would recommend not putting all your shit into something that you don't know. And so when I got approached for this private deal, it was an industry I knew. It was an operator that had a ton of experience. We had a shared vision of what we want to do with the company. And the biggest thing they lacked was capital. And I understood exactly where the capital is going. I knew how he was going to get returns. And here's what's crazy. This investment will probably get somewhere in the neighborhood of 100 to 500% a year. You're like, how is that possible? It's only possible because it's an incredibly high risk investment. But it's high risk for somebody who doesn't know what. they're doing. And so Warren Buffett has two quotes about this that really shifted my perspective. He said, number one, diversification is a hedge against ignorance. It's a hedge against not knowing.

The reason that he tells most people to do the SB 500 is because you realize it's the vast majority of people don't know what they're doing. And so the best and safest thing you can do is just invest in everything and just bet on the stock market overall. Just bet on the economy growing over time. But you're betting on the stock market, you're really betting on a country. You're bidding that this country or even the world, because many of the companies in the top 500 are global, just that the world will grow. That's all you're doing. The second thing that he said is that it's only risky when you don't know what you're doing. And so if you understand the variables, and it's funny because as I've gone through this deal,

I told the guys that imagine you have unlimited capital. I'm willing to write basically a blank check for you if these are the economics of the deal. And he said, awesome. And I only feel comfortable with that because I know where the bodies are buried. I know what risk to look for. I know what the upside would do. I know how I'm going to add value to this deal. But in a real estate apartment building, it's not my game.

And so I feel so much more comfortable writing an enormous check because it's the game that I know. When I write that circle on the table, for me, it's all business. And so I will be divesting from the very small percentage of my net worth that's in real estate. I will hold the equities that I have in ETFs and everything else that I have goes straight into treasuries. And then when big deals come, I plowed into the deal and then I repay back my war chest. Warchest goes back up, plow to another deal, repay back the war chest, plowed into another deal. that is the investment strategy that I am following. And the reason this is so important is that in the

economy today, you have to do the things you know. There's a lot of risk out there right now. And so if you're not sure, I would say, hold and figure out a game that you understand. Because then you don't have to feel like you're betting because that's all I felt like I was doing. I felt like I was betting on people and trying to like see between the lines like, do I trust this person or not trust this person? fuck that. Find something you know, go all in on that one thing. And this is, it's funny because my investment strategy, after all of this time has gone completely back to my business strategy, which is singular focus, do the things you know, do more, do it better, and keep doing that for an extended period of time. And it would be unreasonable that you don't win. So for example,

you can go to Robin Hood or whatever exchange you invest on. If you don't know how do I invest in stocks and you'll be able to download an app that does it. And you can search treasury or bonds and you will be able to go and buy a bond. It is not complicated. Now, I will give you an advanced strategy, though, because Mosy Nation, love you. So great strategy for buying bonds is that there are maturity dates, which means that when does the bond come due? So I was telling you earlier that liquidity matters a lot. So it's like, can I trade in and out of it? Now, bonds come due and when they are due, you're owed the money plus the interest. So what you gave them plus whatever interest was supposed to be owed on top of that. So one strategy is to buy them all at a certain maturity day and then wait. What we have opted to

do is buy six, 12, 18, 24 month bonds. Basically go one quarter, one quarter, one quarter, one quarter. And that means that every six months I get a pop back of cashless interest and then I put it back to another 24 months. And so it becomes this cash recycling machine in the meantime. So that is how I do it. You can still take loans against it. And if you're worried about the value of bonds going up and down, don't because if you do that strategy, you're just banking on the fact that you are going to get the money back. You don't even have to worry about trading them in and out. That's not, you're not a bonds trader. It's not the point here. The point is you're putting somewhere safer than a banking account that will pay you money, pretty much guaranteed unless the government goes under, in which case, we don't need to worry about.

The banks are definitely fucked when that happened. Yeah, so if you're a dentist, right, at a certain point, you will have enough money if you're good at being a dentist and don't do this until you were good enough at being a dentist that you have a lot of extra money, that you could go and buy another dental office. It's a business you know. And what's crazy is that you will get significantly higher returns on that purchase than you would on the stock market. So for example, if you wanted to buy a dental office that did a million dollars top line and $200,000 in bottom line, right? Most of these professional services businesses you can get for a little bit of seller financing, you might only have to put, I don't know, one or two times down. Okay. Now, if you put,

let's say, one times down, meaning you pay $400,000 for the business, $200,000 comes in seller financing from the person who's selling it to you. They let you pay debt off over time. And then $200,000 you put in their pocket. Okay, well, you're one. You get your first $200,000 back, right? And then year two, let's say you pay off the rest of the debt. All right.

Well, when you did that, year three, you make another $200,000. So you're ready to return there. This is me doing back of the napkin. It's basically like 33, 33, 33, 33. So compared to the stock market, et cetera, you're going to do way better. Now, if you know the business, that's just assuming it stays the same. But if you're better at business than the other dentist is, right? Because that's maybe why you're buying the business.

Then you might be able to overnight double that. And then all of a sudden, you're one, you pay back everything. And year two, you make 400, right, versus your 200. So now on a two-year basis, you already doubled your money in two years. And here's what's even crazier. You doubled your money on a cash basis. But now you own your dental practice plus their dental practice. And the combined value of those things is even higher than either of those

individually, and you still own those. And so your total net worth, based on the equity value of those companies, has grown tax-free this whole time, and you already put the cash back in your pocket. That's where you get competitive advantages of knowing the game you're in. So if you're like, well, Alex, I don't know a ton about business. Cool. If you recall, I went through three steps of my investing phase. All right. So the first one was investing in you, right? Investing and increasing your skill set, which is later going to be compounded, because we talk about, leverage all the time, how do we get more for what I put in, you're going to invest in a skill set. And then when you get better at it, you might end up start doing deals only around that stack

of skills that you acquired. But phase one, learn shit. Phase two, when you have earnings, but not enough to really get into the big investing world, you can plow it into the S&P and diversify your risk because you still don't know what you're doing yet. You still have cash flow in access of what you can reinvest in your education, but you're still not like a super G yet, right, at investing. I'm not saying I am, you get my point. All right. The third phase, is, okay, I'm making so much money from the game I'm in, then it makes more sense and it's less risky for me to do more of this game than the stock market. And then that is where you build the crazy wall. And so that's what I would consider to be the three-step. Step one, invest in you.

Step two, invest excess in indexes basically to wait as a holding pattern, keep stockpiling the war chest up. And then when you feel like you're good enough at the game, your main game, then you have the stockpile and you can deploy it and then that starts the compounding machine. And so when you're like, I'm not sure if I'm getting the leverage I need on the skills I'm learning right now. That's not the point right now. You're learning this shit so that later you can lever the crap out of it in conjunction with capital and then it'll blow up.